Tax Magic – Corporate Estate Transfer

How to Unlock Trapped Corporate Assets.Transferring Assets Via the Corporate Estate Transfer Strategy

Owning a business remains one of the best ways to accumulate wealth. In addition to the financial flexibility that a business can offer, the corporate structure enjoys preferential tax treatment. Because corporate income is usually taxed at lower rates than personal income, it often makes sense to accumulate assets within the corporate structure. Over the years, this can make a dramatic difference to a business owner’s net worth.

Many times, owners choose to invest assets held within the corporation in “passive” vehicles such as real estate (the office where the corporation does business, for example), or a corporate-held investment portfolio. While this allows for those assets to grow even further, it does pose two significant problems:

(a) excess taxation upon withdrawal – if the owner wants to withdraw funds from the corporation for personal use, he/she would face two layers of tax: the company pays tax on any profits, and the owner pays personal income tax at marginal rates.

(b) estate planning inefficiency – typically, upon the death of the sole remaining shareholder of a corporation, the corporation’s shares are deemed disposed.

This could force the corporation to sell assets, incurring significant capital gains taxes.

The corporate estate transfer strategy is an effective solution to both these problems. Best suited to owners who have built up significant wealth inside their corporations, the corporate estate transfer strategy allows owners to withdraw assets from their corporations (either while alive or upon their death) without paying tax.

How it works

The key to the corporate estate transfer strategy is a Universal Life (UL) insurance policy. Remember, a UL policy consists of two components: (a) a life insurance policy, and (b) a tax-free investment account.

For the purposes of the estate transfer strategy, the investment account is the critical component. Under government regulations, policy holders can make additional contributions to the UL policy above and beyond the annual policy premiums; as long as those contributions remain within the policy, they can be invested in a variety of different vehicles, and can continue to grow free of tax until withdrawn.

In the estate transfer strategy, the corporation purchases a UL policy on the owner’s life. The corporation is the registered owner of the policy, and the beneficiary of the policy death benefit as well. The corporation pays annual premiums, and makes additional contributions which accumulate in the policy’s investment account. Contributions compound free of tax within the policy.

Accessing capital while alive

If the owner wishes to access capital, it’s possible to access the cash surrender value of the UL policy by borrowing against the policy. Essentially, this allows the owner to access the principal and growth held within the UL policy without paying any tax. Of course, interest will be payable on the loan; however this interest will be far lower than the two layers of tax the owner would otherwise have to pay.

Accessing capital upon death

Alternatively, the estate transfer strategy can be an efficient way to pass corporate assets to heirs. When the owner passes away, the corporation receives the policy death benefit, the additional contributions, and all growth on the contributions free of tax. Because CRA allows proceeds from a life insurance contract to flow through the corporation’s capital dividend account free of tax, the corporate estate transfer strategy effectively allows cash to flow to beneficiaries without tax.

The corporate estate transfer strategy is complex, and relies on a detailed understanding of corporate taxation. Before you execute such a strategy, make sure to review your personal situation with a qualified financial and tax advisor. Working as a team, you can review the advantages of the corporate estate transfer strategy, and find out whether the corporate estate transfer is a viable alternative for you.

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